Question

Globalization is a continuous process whereby managers become aware of the impact of international activities on their companies. This process takes place in stages that include exporting, licensing joint ventures, wholly owned subsidiaries, and global sourcing. Each stage has implications for the type of accounting information reported.

Striking Furs imports furs from Canada. In the space provided below, prepare journal entries to record the following events.

• Dec. 11, 2017: Purchased furs from Capable Trappers, Ltd., a Canadian corporation, at a price of 25,000 Canadian dollars, due in 60 days. The current exchange rate is $0.85 U.S. dollars per Canadian dollar. (Striking uses the perpetual inventory method; debit the Inventory account.)
• Dec. 31, 2017: Striking made a year-end adjusting entry relating to the account payable to Capable Trappers. The exchange rate at year-end is $0.89 U.S. dollars per Canadian dollar.
• Feb. 9, 2018: Issued a check for $21,750 (U.S. dollars) to National Bank in full settlement of the liability to Capable Trappers, Ltd. The exchange rate at this date is $0.87 U.S. dollars per Canadian dollar.

2017	General Journal
Dec 11
Dec 31
2018
Feb 9

Answer 1

Journal entries in the books of Striking Furs
Date	Particulars	Debit (US $)	Credit (US $)
11-Dec-17	Inventory	21250
	Accounts payable		21250
	To record the purchase of furs from Capable Trappers Ltd. Exchange rate - 0.85 US dollars Purchase price = 25000*0.85
31-Dec-17	Loss on foreign exchange (Unrealised)	1000
	Accounts payable		1000
	To record the increase in exchange rate leading to loss in Accounts payable
	Note: Amount of loss = (0.89-0.85)*25000
9-Feb-18	Accounts payable	22250
	Gain on foreign exchange		500
	Cash at Bank		21750
	To record the payment made to Capable Trappers Ltd. (Paid 21750 for full settlement of 22250, difference of 500 being gain on change in foreign exchange )
	Note: Amount of gain = (0.89-0.87)*25000

As per the standards, the company has to recognise the monetary assets using the closing rate in the Balance sheet. Hence, Striking Furs has to restate the Accounts payable account using the exchange rate of 0.87.

As the Accounts payable is restated at 0.87, on the date of payment, to calculate the realised loss or gain on payment, the exchange rate on the date of payment must be compared with exchange rate of 0.87